Cable Killer

Sezmi has a bold plan to make cable companies obsolete. The trick: cozy up to Hollywood and avoid the Internet

Philip Wiser was there when Steve Jobs strong-armed the music industry into the 99-cents-a-song plan. It was 2003, and Wiser was running
Sony
Music's digital division. With piracy destroying the music industry, Jobs' rescue plan was to lure honest people away from theft by cutting prices. Wiser and his peers tried to hold out for better terms, but Jobs patiently waited as piracy's cost kept mounting, refusing to budge on his new pricing model. Wiser and his fellow music executives eventually caved in.

Five years later it's the television show's turn. Streaming Web video and
TiVo
have broken consumption into bite-size views and called into question the concept of a television channel. Piracy is rampant.
Apple
is applying the same pressure to sell individual episodes, for $1.99. "In an on-demand world, a channel is nothing more than a playlist of shows," says Wiser.

Yet he is convinced the cable networks are going to stave off obsolescence for a very long time. No one has the muscle to duplicate Jobs' feat of legitimizing the end of the CD. The TV networks from NBC to ABC to TBS to FX are fighting tooth and claw to maintain the primacy of the network brand and to avoid giving iTunes (or any other distributor) power over their retail pricing.

So Wiser and his business partner, Buno Pati, identified a different profit pool to drain: the billions now captured by the nation's cable and satellite giants. Later this year Wiser and Pati will turn on the Sezmi network, a radical broadcast system that will, they promise, deliver TV shows to most big U.S. markets for roughly half the monthly cost of cable and satellite.

Unlike struggling Internet-based "add-on" services such as CinemaNow, Amazon Unbox and AppleTV, Sezmi aims to replace the cable or satellite box completely. Sezmi hasn't announced a full channel lineup but promises a "comprehensive" tier of favorites such as ESPN, FX and CNN, as well as premium channels such as HBO. Its DVD-player-size box also plays pay-per-view movies and Web video from YouTube and other sites.

Sezmi wrote a clever and simple user interface that shows channel lists the traditional way or groups content into zones, such as football, movies or new content brands ("All Comedy Central content," for instance). Shows and clips related to that zone get stored on the box's huge 1-terabyte hard drive, giving it all the powers of TiVo and then some.

Sezmi's disruptive attack on the cable business comes from an unlikely direction: the air. Cable and telephone companies are spending tens of billions laying capacious underground fiber-optic networks. Sezmi broadcasts most of its shows just like TV stations of yore, sending the rest over your existing broadband connection. Its set-top box (not yet priced) grabs signals from the air and the Web.

To be sure, Sezmi has to live down the sorry record of prior tries at over-the-air video systems. Disney's MovieBeam tried to send movies over the same airwaves, and a company called USDTV tried to offer a scaled-down selection of cable channels over the air. Both went bust.

Sezmi's two founders met two decades ago at the University of Maryland, when Pati asked Wiser if he would keep an eye on his golden retriever while he ran into a classroom. A decade later they wound up living four blocks apart in Silicon Valley and in 2006 had the idea to build a broadcast system for the 21st century.

Eventually they settled on subletting slices of the radio spectrum from TV station owners, who found themselves sitting on oodles of spare capacity following the transition from analog to digital broadcasting. (A single digital TV channel can beam out 19 megabits per second. You can easily stuff six standard-definition TV programs into that band.)

Pati hit the road, negotiating with TV stations in cities around the country. In each place he typically has a dozen stations to choose from and looked to cheaply lease about 30 megabits per second of the stations' spare wireless capacity. Pati won't say exactly what he's paying, but Sezmi has raised only $17 million in venture capital so far. Bidding against cell phone companies for an equivalent block of wireless capacity would have cost Sezmi at least $3 billion. (As a matter of physics, the airwaves Sezmi sublets are slightly better at penetrating buildings than the cellular airwaves. They are vastly cheaper, thanks only to federal regulations limiting their use to traditional TV broadcasts.)

While Pati traveled the country lining up capacity, Wiser wooed the networks. His friendly offer: Sell us your shows for the same monthly fee per subscriber as cable and satellite pay (and sometimes a few pennies more). Both show owners and show watchers prefer that traditional system to à la carte pricing, he says: "You don't want to make a purchase decision every time you sit down on the couch to watch a show."

Then it came time for Pati and his engineers to design hardware that could juggle demand for hundreds of channels and random selections from a library of videos. It was a new challenge for the former Harvard electrical engineering professor, who had built a successful company around a new way of etching microchip circuits that are narrower than the wavelength of light.

Sezmi's system capitalizes on the fact that even in a 500-channel world only a handful of channels account for most of the hours watched. Sezmi will be able to broadcast the two dozen or so biggest shows at any time over the air for instant access.

To cover the long tail of other choices, Sezmi wrote a software algorithm that predicts what shows viewers are likely to want and, when possible, broadcasts those out in the middle of the night to be recorded on customers' hard drives. When viewers request really obscure content, Sezmi will turn to the Internet for downloads--Pati figures that will be under 15% of the time.

By moving most of the data burden to broadcast, Sezmi is getting rid of a declining but stubborn cost in the online video revolution. When a viewer asks to get a TV show delivered over the Internet to one of the several new Web set-top boxes such as AppleTV, Apple pays a few cents to a company known as a content delivery network. Those fees add up. The average American household watches eight hours of TV a day. Even assuming a cost as low as 5 cents per hour, an all-Internet distribution system would cost $17 per month.

Sezmi's service won't work in rural areas where there is poor TV reception, areas with roughly 10% of the population. (And in some places users will be able to get service only if they put an antenna on the roof.) Also, since Sezmi lacks the capacity to send all cable channels over the air when customers want to watch live TV, they will often need to rely on the Internet for delivery. That adds cost to Sezmi and exposes viewers to annoying buffering delays common to Web video, which could make channel surfing balky.

Wiser says Sezmi's goal is not to match cable in performing traditional tasks like surfing from one channel to the next. Just as Steve Jobs fundamentally changed the way people listen to their music, Wiser's goal is far grander: "Sezmi will change the way people watch TV."